MAcro CHAPTER 5.6:

CHAPTER SUMMARY

We have spent a lot of time in Macroeconomics talking about how to get our short-run equilibrium in line with our LRAS. However, this is only a short-term goal. The long-term goal of an economy is economic growth - when the LRAS shifts to the right. This can happen for a few reasons:

• An advance in technology

• Accumulation (an increase in the amount) of physical capital (tools & equipment)

• Accumulation of human capital (worker skills and knowledge)

All three of these things can increase productivity, shifting our LRAS to the right. A rightward shift of the LRAS is basically the same as an outward shift of the PPF, as seen below.

That said, simply adding more people to an economy can also shift the PPF and LRAS outward. However, this doesn't mean that people's lives will be better now. Economic growth is usually measured in terms of Real GDP per capita (the value of the goods produced in an economy, divided by the number of people in the economy). This shows whether people in a country are able to produce and consume more or less than before.

In order to achieve economic growth, economies must do something that causes one of the things in the bullet point list above to occur. Here are some examples of how the government lowering the Federal Funds Rate could lead to each of the following causes of economic growth:

• Because of lower interest rates, more companies invest in R&D (research & development), resulting in greater technological advances

• Because of lower interest rates, more companies invest in equipment for factories, increasing their physical capital and their ability to produce more stuff in the future

• Because of lower interest rates, more people borrow money to get a college education, increasing their knowledge when they enter the workforce

You might think that this means governments should always pursue more expansionary policy, with no tax, tons of government spending, and 0% interest rates. However, we want people to borrow and spend money for valuable things. The lower interest rates go, the less costly it becomes to borrow money, meaning a lot of people borrow money for risky or wasteful things (think: NFTs, metaverse). Because of this, governments want to choose economic policies that result in economic growth without encouraging wasteful borrowing and spending.

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